Balance Sheet ItemsExplained & Defined

Written By:
Adiste Mae

The Balance Sheet is a financial statement that reports the assets, liabilities, and shareholder’s equity at a particular point in time.

It measures the financial position of a company – what it owns, what it owes, and the investor’s total investment amount. 

Common Balance Sheet Items

A Balance Sheet is composed of Assets, Liabilities, and Shareholder’s Equity and is based on this Accounting Equation:

Assets = Liabilities + Owner’s Equity

There are common balance sheet items and they are the following: Cash and Cash Equivalents, Marketable Securities, Accounts Receivable, Inventories, Prepaid Expenses, Fixed Assets, Accounts Payable, Unearned Revenue, Short-term Debt, Long-term Debt, Paid-in Capital and Retained Earnings. 

Current Assets

Current Assets refer to a company’s short-term assets that are expected to be used or liquidated within a period of less than a year to address a company’s immediate needs. 

Cash and Cash Equivalents

This is the most liquid asset on the balance sheet.

Cash is a fund that is readily available to be disbursed immediately while Cash Equivalents are those that can be converted to cash within a period of fewer than 90 days. 

Marketable Securities

Marketable Securities are also liquid assets that are readily available but can only be converted within the normal operating cycle of the business (1 year or less).

Examples of Marketable Securities are stocks, bonds, preferred shares, and ETFs.  

Accounts Receivable

The amount of money owed by the customers to the company for sales made on credit is referred to as Accounts Receivable.

But if the amount is owed by another party except the customers, it is referred to as Notes Receivable. 

Inventories

Inventories is composed of Raw Materials, Work in Progress (WIP), and Finished Goods that are available for sale.

It is one of the sources of a company’s revenue generation. 

Prepaid Expense

Expenses of the company that are paid in advance, typically for a year, are recorded under current assets and are known as Prepaid Expenses.

Typical examples of Prepaid Expenses are Prepaid Rent and Prepaid Insurance. 

Fixed Assets

Assets that have a useful life of more than one year are referred to as Non-Current Assets.

A Fixed Asset is an example of a Non-Current Asset and Property, Plant, and Equipment (PPE) falls under this category. 

Upon purchase, the cost of the asset is not expensed but is rather capitalized over its useful life. 

Property, Plant, and Equipment (PPE)

PPE is a long-term and tangible asset that will be utilized by the company for many years and includes machinery, land, building, etc. 

Intangible Assets

Assets that do not have a physical form are referred to as Intangible Assets.

Examples of which are copyrights, intellectual property rights, patents, software, etc.

Their cost is not expensed and is instead amortized over its useful life. 

Current Liabilities

Current Liabilities are debts or obligations that have a maturity of one year or less.

Common examples are Accounts Payable, Unearned Revenue, and Short-term Debt. 

Accounts Payable

A company’s obligation to pay suppliers is recorded under Accounts Payable.

It is listed as a Current Liability because the business is expected to pay within one year during the current operating cycle. 

Unearned Revenue

Unearned Revenue is the payment received from customers even though the product or services are yet to be delivered.

It is considered a liability rather than revenue because it represents the obligation of the company to deliver the promised good or service to the customer.

Short-term Debt

All debts and obligations of the company that must be paid within a year or less are recorded under short-term debt. 

Long-Term Liabilities

Long-term liabilities are obligations that have maturity dates of more than one year.

Common types of long-term liabilities are long-term debts or bonds the company has issued.

The interest and payment structure of debts vary. 

Bonds usually have the longest term of up to 30 years where a company makes a coupon payment to the lender as stipulated in the bond structure. 

Shareholders’ Equity

Shareholder’s Equity also referred to as the net worth of the company, is calculated by subtracting the total liabilities from the total assets.

Shareholder’s Equity = Total Assets – Total Liabilities

The shareholder’s equity is mainly composed of the paid-in capital or the share capital and the Retained Earnings. 

Paid-In Capital

This represents the total number of shares issued by the company and can either be Common Stock or Preferred Stock.

Shareholders holding preferred stocks have preferential rights to the company’s assets before the common shareholders.

Paid-in capital is the value of the total shares bought at par value.

Any amount paid above the par value is recorded under Additional Paid-in Capital. 

Retained Earnings

Retained Earnings represent the portion of the company’s profit that is retained after paying off dividends to shareholders.

The formula to compute Retained Earnings is:

Retained Earnings = Net Income – Dividends Paid

Final Thoughts

The Balance Sheet is an excellent source of information when investors wish to understand the financial position of the company at any point in time.

When used along with the other financial statements such as the Income Statement and Cash Flow Statement, valuable information may be obtained. 

However, the Balance Sheet also contains information that can be manipulated by businesses and could cause the Net Profit to be overstated, etc.

It is important that the notes on the Balance Sheet must also be read.